Ask Me Anything Summary

The EBIT Community hosted a chat-based AMA session with Jared W. Johnson, Vice President and Senior Business Officer at First Internet Bank. As the Podcast Host of "Before You Buy or Sell a Business" and the 2022 Coleman Publishing SBA BDO of the Year, Jared brought extensive expertise to the conversation, having produced $114,066,000 in SBA 7a lending in 2024 across 62 total loans (55 M&A transactions, 6 startups, and 1 refinance).

Key Insights on SBA Lending

SBA Loan Structures and Advantages

Jared emphasized that First Internet Bank excels at handling complicated or tougher deals without strict collateral requirements. This flexibility provides significant advantages for buyers who might not have perfect situations or traditional collateral. While they may not offer the lowest rates in the market, their approach to debt service coverage ratio (DSCR) requirements is more accommodating – typically looking for 1.25x in the most recent year but willing to go lower when necessary based on the strength of the overall deal.

Jared highlighted several creative structures that can make acquisitions more feasible:

• Initial interest-only periods: Offering 3-6 months of interest-only payments at the beginning of loans to provide critical runway for new owners as they transition into operations

• Standby seller notes: Implementing forgivable seller notes on standby for 24 months to bridge gaps in price and secure better DSCR, effectively providing a financing cushion

• Integrated soft costs: Including advisory and due diligence service costs in the loan amount (typically 1-3% of purchase price), which helps preserve cash for operations

• F reorganizations: Noting a trend toward these tax-efficient reorganization structures that can provide benefits in certain acquisition scenarios

Jared emphasized that many searchers don't realize the flexibility within SBA programs and often approach deals with unnecessarily limited expectations about what's possible.

Working Capital and Lines of Credit

When questioned about SBA express lines of credit (LOC), Jared confirmed they can be included with the initial loan at closing and used immediately – contradicting some participants' experiences with other lenders who required 12+ months of operations before offering LOCs. This immediate access to capital can be crucial for businesses with seasonal needs or long accounts receivable cycles, providing a significant advantage in cash flow management during the transition period.

Personal Guarantees and Asset Protection

The discussion around personal guarantees was particularly detailed, as this represents a major concern for many searchers. Jared confirmed the unavoidable reality that anyone owning 20% or more in the business must provide a personal guarantee for the full loan amount (not just the unguaranteed portion).

Several nuanced aspects of personal guarantees were addressed:

• Spouse involvement: While banks often prefer having spouses sign, it's not always required. Jared clarified that spouses only need to sign if their income is being used toward personal expenses calculations or if jointly-owned property is being pledged. In cases where only a limited guarantee is involved (such as for a house), the spouse could sign just that limited portion.

• Property ownership structures: When asked about property held in trusts or by family members, Jared explained that the SBA would only require the property as collateral if the guarantor directly controls the entity. Properties owned jointly with non-guarantors might avoid being included in collateral requirements.

• Multiple acquisitions: The community discussed strategies for married couples potentially acquiring separate businesses with separate SBA loans. Jared noted that recent rule changes make this possible as long as the spouses don't have joint ownership in either entity, creating potential opportunities for family acquisition strategies.

• Family property inheritance: When a participant asked about inherited property being placed in trusts for asset protection, Jared cautioned that if the borrower owns the trust or controls the entity, the SBA would still require it as collateral. However, properties owned with family members could potentially be structured to avoid collateral requirements.

These insights revealed that while personal guarantees themselves cannot be avoided in SBA lending, there are legitimate planning opportunities around how assets are held and structured that can impact what gets included in those guarantees.

Learn more about EBIT Personal Guarantee Insurance (coming soon).

Due Diligence and Business Evaluation

Jared emphasized several critical factors when evaluating a business for acquisition:

1. Financial verification: Obtaining and thoroughly verifying good financial records and tax returns, paying particular attention to trends and consistency across documents

2. Seller motivation: Understanding why the seller is truly selling – asking repeatedly and in different ways to uncover the complete picture

3. Expert guidance: Working with experienced lenders who understand the nuances of the specific business model and industry

He noted that First Internet Bank's evaluation process looks at businesses from multiple dimensions:

• Financial performance and trending (historical and projected)

• Market position, competitive advantages, and growth potential

• Buyer's experience, qualifications, and fit with the business model

• Industry outlook and resilience to economic fluctuations

Jared strongly recommended engaging a lender early in the process – ideally before getting too far along with a seller – to structure deals appropriately and avoid wasting time on transactions that won't work financially. He emphasized choosing an experienced lender over simply seeking the lowest interest rate, as expertise in structuring and navigating complex deals ultimately provides more value than a slightly better rate.

Current Market Trends

When discussing industry trends, Jared provided insights into sectors showing strength and those facing challenges, which align with his 2024 M&A transaction breakdown:

• Construction (7 deals): Demonstrating strong performance in the acquisition market

• Restaurants (6 deals) and Medical (6 deals): Showing significant activity despite some concerns about consumer spending

• Ecommerce (4 deals) and Manufacturing (4 deals): Continuing to attract buyer interest

• Specialized services: Including signage (3 deals), HVAC (3 deals), gyms (2 deals), and water distribution (2 deals)

• Diverse single transactions: Spanning industries from FedEx routes to CPA firms, SAAS, security, and specialized service businesses

Jared highlighted CPA firms as potentially undervalued opportunities, noting they often trade at lower multiples despite having stable, recurring revenue and strong client relationships. He also mentioned that while licensing requirements exist in some industries, buyers can often structure deals to work around these constraints by maintaining properly licensed professionals on staff.

Additional Business Acquisition Insights

Throughout the discussion, Jared shared numerous practical insights that reflect his experience closing dozens of deals annually:

• Realistic pricing: Sellers typically accept offers at 70-80% of list price, with significant retrading often occurring during due diligence as buyers uncover issues

• Buyer psychology: Successful buyers focus on offering what allows them sufficient cash flow to weather unexpected challenges rather than stretching to win deals

• Relationship dynamics: The most successful buyers quickly identify what sellers are passionate about and address their concerns about selling, focusing on building trust and rapport

• Deal team importance: Working with experienced attorneys, lenders, and advisors significantly increases closing probability and post-acquisition success

Jared emphasized that successful acquisition isn't just about securing the lowest price but structuring a deal that works for both parties while ensuring adequate working capital for the buyer post-closing. He compared business acquisition to dating – advising searchers not to settle for a bad fit just because they're tired of looking, as the consequences of a poor match are substantial and long-lasting.

The session provided valuable insights for searchers at all stages, combining technical knowledge about SBA financing with practical wisdom about the business acquisition process from one of the industry's most productive lenders.

The EBIT Community thanks Jared for sharing his expertise. Members are welcome to connect with him directly through LinkedIn for further discussion.

Coming Soon: EBIT Personal Guarantee Insurance

EBIT is developing personal guarantee insurance for SBA borrowers, launching in mid-2025. When acquiring a business with SBA financing, your personal assets are at risk - but our innovative solution will safeguard your home, savings, and future by covering up to $5 million (the maximum SBA loan amount) in the event of default. This insurance provides critical protection against one of the most significant risks in business acquisition, giving you peace of mind while making you a smarter, more confident buyer. Join our waitlist today to get early access when we launch!

Join Our Community

Our searcher community recently hosted Jared Johnson, who closed $114M in SBA loans in 2024. Members gained practical knowledge on creative financing structures, personal guarantee protection strategies, and how lines of credit can be established at closing. Jared shared industry-specific insights across construction, restaurants, medical, and e-commerce while emphasizing realistic deal valuations and the importance of seller relationships. This session exemplifies our community's value – experienced professionals freely sharing knowledge with fellow searchers at all stages.